Loan Servicing Reform Key in Housing Recovery

Officials of both the Mortgage BankersrnAssociation (MBA) and the Federal Deposit Insurance Corporation (FDIC) toldrnCongress Thursday that resolution of the problems that have plagued thernmortgage servicing industry through the housing and foreclosure crises must bernresolved before the housing market can fully recover. </p

Mark Pearce, Director of FDIC’s Divisionrnof Depositor and Consumer Protection and David H. Stevens, President and CEO ofrnMBA testified to a joint hearing of the House Subcommittees on FinancialrnInstitutions and Consumer Credit and Oversight and Investigations Committee onrnFinancial Services on “Mortgage Servicing: AnrnExamination of the Role of Federal Regulators in Settlement Negotiations andrnthe Future of Mortgage Servicing Standards.”</p

Pearce told that committees that, whilernearlier actions of the primary federal regulators to issue enforcement ordersrnagainst the largest mortgage servicers should, if correctly implemented, putrnservicers on the path to working effectively to resolve defaults going forward,rnthis review did not look at errors in the past. rnThese past practices used by servicers in modifying loans and inrnprocessing foreclosures have given rise to a multitude of actual and potentialrnclaims in litigation, clouding the status of recent foreclosures and titlerntransfers.  The market anxiety surroundingrnservicer performance is dampening expectations about the housing market’srnrecovery and is discouraging the return of private capital to the mortgagernmarket.</p

Pearce said that, while FDIC is not thernprimary federal regulator for those large servicers responsible for most of thernservicing and foreclosure deficiencies, they have worked to address problemsrnwith mortgage servicing operations.</p

Following the “robo-signing” revelationsrnlast fall and the subsequent reviews by regulators, servicers signed consentrnorders which require them to retain independent, third party consultants tornreview past foreclosure actions and report the reviews back to thernregulators.  These reviews, Pearce said,rnmust be independent and comprehensive in order to identify errors and providernmeaningful remedies to borrowers harmed through those errors.  </p

Servicing problems continue to presentrnsignificant operational and litigation risks. rnThere are currently 90,000 homeowners involved in actions to forestallrnforeclosure.  In addition, FDIC is tracking:</p<ul class="unIndentedList"<li67rnpending class-action suits in 23 states challenging foreclosures related tornrobo-signing, defective assignments, the MERS system or misapplication ofrnpayments; </li<li57rnclass action cases in 25 states alleging improprieties in processing loanrnmodifications under the Home Affordable Modification Program (HAMP); </li<li24rnclass actions in 18 states alleging misconduct under non-HAMP modificationrnprograms</li<li21rninvestor suits in 12 states alleging foreclosure and securitization misconduct relatedrnto originator action;</li<liThreernsuits brought by three Attorney's General against two major lenders with morernsuch suits expected.</li</ul

These legal actions and the anxietyrnsurrounding them as well as ongoing servicing and foreclosure problems willrncontinue to hinder the recovery of the housing and mortgage markets Pearcernsaid.  Loans in foreclosure are takingrnlonger and longer to process, more than doubling between the end of 2007 andrn2010 while the pace of loan modifications has declined.  “Coupled with the impact of the marketrnuncertainty regarding the impact of allegations of past errors, this currentrnshadow inventory of non-performing loans in the foreclosure process hinders thernclearing of the housing market.”</p

Improving servicing, Pearce said,rnwill take both market reforms and regulatory reforms and the incentivernstructure of mortgage securitizations must also be addressed.  While HUD has begun to rethink compensationrnfor mortgage servicers they must keep in mind the implication of changes onrnsmall or community bank servicers who have not been guilty of the shortcomingsrnof large bank servicers.</p

Pearce said that thernexperience of FDIC suggests that there are certain common-sense practices thatrnshould be incorporated into servicing and securitizations:</p<ul class="unIndentedList"<liServicers should havernthe authority and be granted appropriate incentives to mitigate losses onrnresidential mortgages, address reasonably foreseeable defaults and do what isrnnecessary to maximize net present values of mortgages to benefit all investorsrnnot just a particular class of investors. </li<liServicers must be required torndisclose any ownership interests and have a pre-defined process to addressrnsubordinate liens they hold on properties that also secure loans in pools theyrnservice. </li<liServicers must establishrna single point of contact for borrowers for purposes related to collection,rnloss mitigation, and foreclosure in a manner that ensures timely, effective,rnand efficient communication.</li<liServicers must providernsufficient staffing to manage loss mitigation, collateral management,rncollections, and foreclosures to comply with state and federal laws and providernadequate training to that stuff.</li<liServicers must maintain sufficientrndocument control to ensure foreclosure proceedings that comply with relevantrnlaws.</li</ul

Over the last few years the servicing system has “ill-servedrnall parties involved – borrowers, lenders, neighborhoods, and investors,”rnPearce said, “and has impaired the health and recovery of the housing andrnmortgage markets.  Addressing thernproblems that have been uncovered is critical to reducing the risk of a widerrndisruption to the foreclosure process, a larger cloud of uncertainty over thernownership rights and obligations of mortgage borrowers and investors, andrnfurther significant claims against firms central to the mortgage markets.”</p

Stevens agreed that the mortgage servicing system “admittedly failed a greatrnnumber of consumers during the recent foreclosure crisis.”  There was, he said, a perfect storm when thernglobal economy collapsed, the subprime market failed, unemployment and loanrndefaults soared and “It is clear that the real estate financernindustry as a whole was unprepared to handle these unprecedented events — andrnthat mistakes were made.”</p

Today, Stevens said, trust is lacking at every level of thernindustry.  “There is a lack ofrntrust between borrowers and servicers. There is a lack of trust betweenrnservicers, regulators, the state AGs and the courts to find a joint solution asrnto how to equitably handle borrowers facing foreclosure. And there is a lack ofrntrust between investors, underwriters, and credit rating agencies to restorernprivate capital to the mortgage market in a meaningful way. Without trust, thernhousing industry goes nowhere.  And by trust, I mean the ability ofrnpolicymakers, borrowers and the industry at large to have faith in the productsrnand services we provide, and how those loans will be serviced.  We must dornbetter moving forward. “</p

MBArnbelieves that consolidated national servicing standards are necessary tornstimulate much of the needed reform of the system.  Stevens referenced his past experience when,rnas FHA Commissioner, he was able to achieve reform of that agency and said hernbelieves the environment now exists to reach similar agreement among regulatorsrnand stakeholders regarding servicing standards. rnSuch a national standard would streamline and eliminate many overlappingrnrequirements, he said, and provide clarity for everyone involved, but it isrncritical that the regulators act in coordination to develop a standard thatrnapplies to the entire industry  “rather than each piling on requirementrnafter requirement.”</p

Developingrnsuch a standard should involve a complete analysis of existing requirements forrnservicers and state laws regarding foreclosures and all stakeholders must berninvolved in an open dialogue.   “Servicingrndoes not exist in a vacuum, Stevens said.  “Instead, it is part of arnbroader inter-dependent and inter-connected ‘ecosystem’ that involves all thernvaried elements of the mortgage industry.  The housing market remainsrnfragile.  Therefore, when considering changes to the current model, policyrnmakers must be mindful of unforeseen and unintended consequences that couldrnultimately result in higher housing costs for consumers and reduced access torncredit.

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